Creditors face new risks as EU drives insolvency harmonisation

Directive (EU) 2026/799 harmonising certain aspects of insolvency law - commonly known as Insolvency Directive III - has now passed into EU law, establishing a common minimum framework for dealing with insolvent businesses across the bloc. Member states have less than three years to transpose the new rules into national legal systems.

The Directive marks a major step towards the creation of more harmonised insolvency regimes within the EU and has been broadly welcomed. The web of contrasting insolvency rules across the EU has long been recognised as a barrier to a stronger Capital Markets Union and a deterrent to cross-border investment. Nevertheless, reservations around the new insolvency framework remain. 

The new laws go some way to addressing the challenges of fragmented local systems, but not all the way. In addition, it seems that the drive for efficiency has come at the expense of creditor protection. In the rest of this article we’ll explore the new legislation in depth: why it was needed, what it hopes to achieve, and how credit insurance can mitigate the risks that partial harmonisation may introduce.

From fragmentation to harmonisation 

Certainly, the current situation is widely regarded as unsustainable. Competing national insolvency laws hamper the proper functioning of the internal market and the Capital Markets Union. Fragmented regulation impedes the exercise of fundamental freedoms, such as the free movement of capital and the freedom of establishment.

“The EU is entering a decisive phase in its efforts to reshape and harmonise insolvency and restructure frameworks across the bloc,” says Lutz Jansen, Attorney-at-law and Expert Advisor, Special Risk Management at Atradius. “By aligning core elements of substantive insolvency law, the EU aims to remove one of the most persistent obstacles to deeper financial integration, strengthening both the Capital Markets Union and the competitiveness of the European economy as a whole.”

The Directive, along with the Preventive Restructuring Directive, is part of a concerted effort to reduce confusion in national insolvency and restructuring frameworks and create consistent, EU-wide practices. It provides new minimum rules in five main areas:

The objective is to deliver insolvency proceedings that are faster, more efficient and easier to navigate for debtors and stakeholders.

For example, pre-pack proceedings allow for the swift and efficient sale of a troubled company's business or assets, often negotiated before formal insolvency proceedings begin. The aim is to allow viable businesses to keep running rather than default to liquidation and thus increase the attractiveness of cross-border distressed mergers and acquisitions (M&A) transactions. Asset tracing, meanwhile, gives insolvency practitioners greater powers to trace assets across the EU and recover hidden funds.

Taken as a whole, policymakers hope the Directive will preserve jobs, bolster economic stability, and make the EU a more attractive place to do business, while also strengthening creditor protection. It is likely to achieve the first three. The last one is open to question.

The limits of harmonisation

The Directive’s purpose is to create a baseline of harmonisation on which member states rebuild their own insolvency systems. “Member states keep significant discretion over key elements, such as insolvency triggers and claim ranking,” says Jansen. “Inevitably, the scope and quality of national implementation and enforcement will vary across jurisdictions. The EU deliberately avoids a single insolvency regime which means that, while legal certainty could improve under the new laws, it will not become uniform. Cross border creditors must still navigate multiple legal systems,” says Jansen.

The Directive sets minimum standards but leaves significant scope for local interpretation. This ensures that insolvency proceedings are tailored to the individual circumstances of member states, but presents challenges around transparency, participation, and enforceability.

In other words, the new rules will improve consistency but they won’t create uniformity. That’s an administrative headache for cross-border investors and suppliers. It also raises legitimate concerns over whether the right balance has been struck between more efficient insolvency regimes and proper protection for creditors.

Are creditors sufficiently protected?

The framework seeks to strengthen creditor protection, but the flexibility afforded to member states over implementation means that protections will be applied differently across the bloc. A supplier might find their interests are better protected in one EU state than another when customers struggle to pay invoices.

At the same time, the reform agenda prioritises quick results, value protection, and restructuring; improving efficiency and predictability for business owners, employees, and investors. The risk is that the EU legislation focuses on business rescue and broader economic stability, and in doing so, it seems to accept weaker individual creditor protection, especially as the rules are transposed into different national systems.

“The Directive marks clear progress, but it risks prioritising speed and flexibility over robust creditor protection,” says Wencke Mull, Regional Head, Risk Services at Atradius. “It sets minimum standards rather than ensuring consistent safeguards. This creates a structural imbalance; creditors gain more efficient proceedings, but not necessarily stronger rights or better recovery outcomes. The reform improves the standardisation of proceedings but stops short of delivering the level of predictability and protection that investors and credit providers ultimately need to rely on.”

To take one example, there is concern that pre-pack proceedings are weighted towards value preservation rather than creditor protection. The rules facilitate the easy sale of distressed businesses and their assets, increasing the likelihood that operations will continue. But creditors have been given little say in a process designed for speed and efficiency.

"The issue here is that creditor approval of the intended sale is only optional and lies in the discretion of each EU member state," says Mull. “Negotiations can take place with limited creditor involvement. The risk is that creditors do not have sufficient visibility over the transaction or the ability to challenge valuations as sales progress at speed, and that value transfer favours certain stakeholders over others”, says Mull.

Moreover, within pre-pack proceedings, the general rule is that contracts necessary for the continued operation of the business and not yet fulfilled are transferred to the purchaser of the business without the consent of the contracting party, that is, the debtor’s creditor. However, member states have the option to provide that - depending on the nature of the contract, the nature of the parties, or the interests of the business - the consent of the creditor is required. As a result, a creditor could be forced to continue business operations with a company having a completely different risk profile without a chance to carry out a proper risk assessment upfront.

These fears are not academic. Spain and the Czech Republic abstained from the final vote on the Directive, worried that the proposals lacked sufficient anti-abuse mechanisms and creditor protection. 

That said, policymakers have tried to strengthen creditor protection in some areas. For example, the Directive facilitates the creation of creditors’ committees, designed to strengthen the involvement of creditors in insolvency proceedings, with the committee representing the interests of the general body of creditors. But how much power and influence these committees will actually wield is in the gift of member states. Nothing is guaranteed in law and much will depend on implementation. In many member states, there are no best practices yet.

Finally, the Directive will run alongside the European Commission’s recent proposal on a new corporate legal framework (known as EU Inc.) as part of a broader strategy to strengthen the competitiveness of the European economy. It is intended to complement the 27 national corporate law systems of the member states. The target group is especially innovative startups and growing companies which can opt for the EU Inc. and then benefit from a digital and less bureaucratic framework for the entire life cycle of a business (from incorporation to liquidation). The Commission’s proposal contains simplified winding-up proceedings for innovative startups in which - under certain circumstances - the appointment of an insolvency practitioner is not mandatory. Fears persist that EU Inc.’s introduction of such simplified and fully digital insolvency procedures for some businesses could undermine the role of insolvency practitioners. These professionals traditionally play a key role in safeguarding creditor interests. 

Credit insurance fills gaps in legal protection

Despite reservations, the EU’s direction of travel is positive. Greater harmonisation and faster proceedings support a more integrated and efficient market. But the current balance has the potential to prioritise quick resolutions and flexibility at creditors’ expense. 

When suppliers lack certainty and visibility, risk increases. Credit insurance strengthens supplier protection when legal safeguards remain uneven or incomplete. 

“When insolvency proceedings prioritise speed and efficiency, suppliers often face reduced visibility and weaker influence over outcomes,” says Mull. “Credit insurance offsets this by securing receivables, ensuring that suppliers remain protected when recovery processes are uncertain or delayed.” 

Insurers also actively reinforce supplier resilience by continually monitoring buying businesses for early warning signs of financial distress. They translate complex national insolvency regimes into clear, actionable risk insights. Ultimately, credit insurance becomes a practical layer of protection for suppliers, complementing legal frameworks. It ensures that suppliers can continue to operate, extend credit, and grow, even where gaps exist in official creditor protection.

What’s clear is that the European legal environment around insolvency is undergoing rapid change. While growing harmonisation is welcome, creditors need to protect themselves against situations where a combination of new EU laws and national priorities nudges the balance of risk against them.  
 
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